We are maintaining our long-term Neutral rating on one of the world's largest energy companies, BP Plc (BP). Although the company missed our expectation in the second quarter of 2011, its string of upstream activities keeps us upbeat on its ability to regain its old form.
Last quarter, BP reported lower-than-expected second-quarter 2011 earnings mainly due to lower production volumes (including the impact of divestments) and higher costs (including rig standby costs in the Gulf of Mexico/GoM). These were partly balanced by higher oil and gas price realizations.
The volume loss was mainly due to the asset sale program that BP undertook to cover costs related to the GoM disaster. Higher maintenance costs in the North Sea and Angola, as well as lower production in the GoM were also responsible for the decline.
Importantly, BP expects 2011 production to be in line with its prior forecast of around 3.4 million barrels of oil equivalent per day (MMBoe/d), down 11% from the 2010 level. This not only reflects disposals but also an exceptionally heavy maintenance season. Operational interruptions in the GoM, ensuing acquisitions and divestments, as well as a seasonal ramp up in turnaround activity are expected to dampen production in the upcoming quarter.
On the flip side, we believe BP's new strategy of active portfolio management, higher exploration activity and refining and marketing repositioning will create value for shareholders. Exploration success will be the key for the company to deliver strong future growth and re-establish its position following the oil spill. The company’s position will be further enhanced by stronger oil price environment and upstream portfolio.
The company’s broad turnaround activity this year, along with asset divestitures (totaled $25 billion as of June 30, 2011), is expected to result in a stronger asset base, which will in turn support the objective of cash flow growth outpacing production growth. For this, the company has nine projects scheduled for start-up in 2012–2013 that will add approximately 250 thousand barrels of oil equivalent per day.
These projects are mainly in high-margin areas like the North Sea, Gulf of Mexico and Angola. BP expects to add 1 MMBoe/d of production from new projects by 2016.
While the GoM tragedy has affected BP’s share performance, we expect the company to recover going forward. BP, which competes with Royal Dutch Shell plc (RDS.A), ExxonMobil Corp. (XOM) and Chevron Corp. (CVX), holds a Zacks #3 Rank (short-term Hold rating).
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